With many lenders these days only requiring a 5% or even 3.5% down payment on a mortgage loan, you may be tempted to only put this small amount down. This may be a great option if you really need to get into a home soon and only have limited funds. However, if you have the money available to make a larger down payment, it's often a wise choice to do so. Here's a look at the benefits of making a larger down payment.
You won't pay private mortgage insurance.
If you don't make a down payment of at least 20% of the cost of the home, then you have to pay PMI, or private mortgage insurance, each month. PMI protects the lender in the case that you don't pay your mortgage -- it does not have any real benefit to you. By making a larger down payment, you eliminate private mortgage insurance, saving you money in the long run.
Your monthly payments will be smaller.
The more money you put down, the less your actual loan amount will be -- and the less your monthly payments will be. It's easier to budget for a smaller mortgage payment, and having that smaller payment may be a real benefit if you ever experience job loss or a reduction in wages.
You won't pay as much interest in the long term.
The more money you borrow, the more interest you'll pay your lender over the life of your loan. Here's an example that illustrates just how much you can save. Assume you get a mortgage at 4%. If you borrow 200,000, you'll pay about $143,000 in interest over the life of a 30-year loan. If you borrow only $160,000, you'll only pay $114,000 in interest over the life of the loan. Those are some substantial savings!
You may have an easier time finding a lender.
The less you want to borrow, the more willing lenders will be to approve your loan. So, if you put $40,000 down, for example, you may have more banks willing to lend to you than if you were to put only $20,000 down. You may even get a better rate since some more selective lenders may be willing to work with you.
If you have the money to make a larger down payment on your home, it's usually a wise decision to do so. Talk to your real estate agent or financial advisor for more specific information regarding your own situation.